Corporate Tax Wolff Spring 2015
C Corporations – subject to double taxation
Hypo: Strip Mall – all finance $50K income after everything is paid
C corp – § 11 – get 15%
S Corporations – FL(or any jurisdiction) – just like any other – make an election for IRS – that while you have limited liability – there is no tax – except for corporate level – everything flows through to the owners – 75 / 25 hypo division
– example – to take loses on your personal 1040
– partnerships are flow throughs – no double taxation
39.6% – taxation highest tax bracket
243(a) – 70% dividends excluded from corporation
Sham Transaction:
No legitimate business purpose
No Economic Substance
Step Transaction:
What is the difference between Subchapter S and C. Subchapter S elections have restrictions: can’t have more than 100 shareholders, no foreign investors.
Sec. 11 Tax Imposed On Corporations
(a) Corporations in general
A tax is hereby imposed for each taxable year on the taxable income of every corporation.
(b) Amount of tax
(1) In general
The amount of the tax imposed by subsection (a) shall be the sum of—
(A) 15 percent of so much of the taxable income as does not exceed $50,000,
(B) 25 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000,
(C) 34 percent of so much of the taxable income as exceeds $75,000 but does not exceed $10,000,000, and
(D) 35 percent of so much of the taxable income as exceeds $10,000,000.
In the case of a corporation which has taxable income in excess of $100,000 for any taxable year, the amount of tax determined under the preceding sentence for such taxable year shall be increased by the lesser of (i) 5 percent of such excess, or (ii) $11,750. In the case of a corporation which has taxable income in excess of $15,000,000, the amount of the tax determined under the foregoing provisions of this paragraph shall be increased by an additional amount equal to the lesser of (i) 3 percent of such excess, or (ii) $100,000.
PROBLEM PAGE 27
Determining Income:
(a) Determining corporate level gross income:
Inventory sales 2,600,000
Capital gains 200,000
Gross income 2,800,000
Exclusion under §103(a) for $10,000 muni-bond interest received.
Deductions:
Operating expenses 800,000
Depreciation (ACRS) 800,000
Capital loss (220, but limit to gain) 200,000
Total deductions 1,800,000
Taxable income 1,000,000
Tax Liability:
First go to—————–à § 11(b)(1) tax calculation on $1 million taxable income (2.8 gross less 1.8 deductions):
15% of 50,000 7,500
25% of 25,000 6,250
34% of 925,000 314,500
= 328,250
See 11(b) Flush Language: Plus: lesser of (5% of 900,000): $45,000 or 11,750
11,750
Total regular tax liability 340,000
Effective Tax Rate: (Total Tax Liability 1,000,000 ÷ 340,000 (taxes) = 34% so the flush language essentially gets rid of the lower tax rate brackets 15/25 and makes it a flat 34. The second flush language eliminates the benefit of the 34 tax rate to 35.
PROBLEM (B) Intro to double taxation:
Distribution of $660,000 (330K to each shareholder) which is taxable income under see §61(a)(7)
20% percent of $660,000 = $132,000
Total taxes: (340 + 132) $472,000
Amount for shareholders: $528,000
Effective tax rate: 47.2%
PROBLEM (C)
$500,000 salaries paid – to eliminate all corporate level taxable income. Each person would pay 40% income tax (200,000). So now the total taxes woul be 400,000 (40% of each salary)
What if they capitalize it? The two people loan the money or trade it for stock. If they loan the company $400,000 with 10% interest therefore the Corporation would pay them 40,000 interest money which would be deduction of the company. What about paying them a lower salary then give them matching 401k, health insurance, etc.
Pg. 26-27 (in other words)
A) First: What is the income?
Sec. 103(a) interest in not considered income
Operating Expenses is deductible (800k)
Depreciation is deductible (800k)
Capital losses are deductible, but limited by capital gains (200)
TOTAL Corporate Income:
2,600,000- 200k Capital gians= 2,400,000
2,400,000 – 1,800,000 (total
ion “immediately after the exchange.”
TRANSFERORS
§351
§368(c): control—ownership of stock possessing 80% voting power and 80% of shares that don’t have voting power. à 80% of BOTH class of stocks.
§358(a): transferred basis—whatever the basis of the assets they transfer becomes the new basis of the stock.
§1223(1): carryover holding period
CORPORATIONS
§1032(a): no gain or loss on the issuance of stock.
§362(a): carryover basis—basis shall be the same as it would be in the hands of the transferor (transferred basis) increased by amount of gain recognized on the transfer as a result of their being boot.
§1223(2): carryover holding period
§362(e)(2): step-down basis for built in losses
§362(e)(2)(C): election to transfer loss—Possible election to reduce specific shareholder’s stock basis to fair market value & keep the loss tax basis at the corporate level.
362(e)(2): in general built in loss/gain allocate basis to suit needs.
PROBLEM PAGE 60
Pg. 60
A,B, C, D, and E, all individuals, form X corporation to engage in a manufacturing business. X issues 100 shares of common stock. A transfers $25k cash for 25 shares; B transfers inventory with a value of $10k and a basis of $5k for 10 shares; C transfers unimproved land with a value of $20k and a basis of $25k for 20 shares; D transfers equipment with a basis of $5k and a value of $25k (prior depreciation taken was $20k) for 25 shares; and E transfers a $20k (face amount and value) installment note for 20 shares. E received the note in exchange for land with a $2k basis that he sold last year. The note is payable over a five-year period, beginning in two years, at $4k per year plus market rate interest.
